Japanese candles are graphic tools used by the rice merchants since the 17th century but they have become popular only in the '90s thanks to Steve Nison.

Japanese candles show the price movement over a certain period of time, and here we refer to any of the trading platform timeframes, like 1 min., 5 min., 15 min., 30 min., 1 hour, 4 hours, 1 day, 1 week, one month etc.

As mentioned above, they show us the opening and closing price, the maximum and the minimum price traded on that range.
 

The white / green candles suggest a price rise - Close Price > Open Price.
Black / red candles suggest price fall - Close Price < Open Price.

 

Japanese Candlesticks’ Anatomy

Depending on the features of their components, the Japanese candles provide us with important information about the price and dynamics behind it.

Long bodies suggest an intense activity in the market during the given timeframe.
Thus, long white candles suggest a big number of buyers/long positions, and long black candles suggest a big number of Sell Orders/short position, on the chosen timeframe.

• A large number of Buyers ⇔ high demand => price increases

• A large number of Sells ⇔ high offer => price falls

Obviously, the longer the candle's body, the bigger the difference between the opening price (O) and the closing price (C). The candle’s body itself represents the price variations on that timeframe.

Short body suggest that either Buys or Sells had a small share over the selected timeframe.

Long shadows suggest that there are many trades above/under the Opening and Closing Price.

Short shadows suggest that most of the trades took place near Opening Price and Closing prices.

If the upper shadow is longer than the lower shadow there where many buyers in the market, but they have failed to push the Closing price up in front of Sellers.

If the lower shadow is longer than the upper shadow there were many sellers in the market, but the buyers managed to push the price back.

 

Types of Japanese candles:

1. Spinning Top - is has a short body and long shadows.

 

The closing price is near the opening, although the long shadows show us that there was a great number of Buy and Sell orders in the market.
The fluctuation of the price is proportional to the distance between Open and Close.

A spinning top may signal a trend change – a small number of Buyers during an ascending trend or a small number of Sellers during a descending trend.

2. Marubozu - a candle without shadows

Bullish Marubozu: Open Price = High Price and Close Price = Low Price
This candle suggests that the Buyers are in control. It usually occurs at the beginning of an ascending trend or as a sign of its continuation.

Bearish Marubozu: Open Price = High Price and Close Price = Low Price
This candle suggests that the Sellers were in control over the whole timeframe. It is a strong bearish indicator, marking either a bearish reverse or the descending trend’s continuation.

3. Doji

This candle has a very thin body, having the appearance of a line.

Open = Close or Open approximately = Close

This candle type shows that the price closed at the same level or very close to the opening price. Although the price has moved on the chosen timeframe, neither the Buyers nor the seller managed to gain the dominant position.

Depending on the length of the shadows, there are four special types of Doji.

 

The meaning of a Doji depends on the candles that comes before it.

 

A Doji after a Bullish Marubozu suggests that the Buyer are week, which could end the ascending trend.
A Doji after a Bearish Marubozu suggests that Sells have decreased, which could mark the end of a descending trend.

In order confirm the chances for a revers, it is also necessary to confirm the increase of the long positions.
Such a confirmation could be a white candle after Doji, having the Closing price above the Opening Price of the candle before Doji.